Ginnie Mae Probes Churning Controversy on VA Refis

Houses

A current investigation is underway regarding a possible case against some lenders who are believed to have pressured veterans and servicemembers into prematurely refinancing their VA mortgages. A task force headed by Ginnie Mae is investigating the issue.

The unpleasant practice not only cost VA homeowners thousands of dollars, but may have also caused drastic consequences to the trillion-dollar bond market buttressed by these loans.

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The issue

Leading the inquiry is Government National Mortgage Association, more commonly known as Ginnie Mae. This government corporation is primarily tasked to make mortgages affordable to Americans by backing mortgage bonds. This means they ensure lenders repayment of these loans should borrowers fail to repay what they owe.

For now, this mortgage bond market is estimated to be worth $2 trillion, covering a variety of programs including those originated by the VA.

The issue at hand is concerned about some lenders misleading VA loan carriers into refinancing their mortgages even when they really don’t need to do so in order to generate profit from the refis.

In the mortgage industry, this malpractice is called “churning.” When successful, it allows the lenders to gain from the refi fees but leaves the VA borrower at a disadvantage by resulting into high loan balances.

Task force set up

Apparently, the issue has grown in significance that it has already been noticed by legislative critics who are now inquiring into the “realness” of the problem. One of which is Sen. Elizabeth Warren who directly asked Ginnie Mae’s acting president Michael Bright about whether or not the alleged rumors are true or not.

Bright answered by saying:

“There are clearly some Ginnie Mae-approved issuer companies who appear to be taking advantage of the VA program to aggressively market and churn loans in our securities,” Bright wrote in a letter response to the Massachusetts state Democratic senator and known financial industry critic.

But why VA loans specifically?

When a refinancing decision is made, lender and borrower sit down to ensure that the resulting new loan will benefit the borrower.

In the case of VA loans, issuing VA lenders are not pressured to show such benefit. Instead, they bait borrowers by luster-packaging the ease of refinancing a VA loan (i.e. no down payment, no credit check, no asset and income verification, etc.) and sweet-talking them about the potential benefits to be gained by refinancing (i.e. reducing their monthly mortgage payments, taking out cash to pay off credit card debts, etc.).

For now, a Lender Abuse Task Force is created to curb churning activities by lenders who prey on the gullibility of many VA borrowers by using tools of misinformation.

As of November last year, the Consumer Financial Protection Bureau already received some 1,800 complaints from VA homeowners who said they have received repeated calls from lenders convincing them to refinance.

Cheapening Ginnie bonds

In a research report released by JPMorgan Chase & Co. last week, it is revealed that prices of securities backed by Ginnie Mae are pulled down by frequent refinanceevents.

This is because investors see refinance frequency as one of the primary factors that impact their own profits. The sooner a loan is refinanced, the more they risk losing their expected returns. The current refi surge then made Ginnie Mae held bonds less attractive, relaxing the demand, and thereby driving their prices down.

The decline in prices of securities do not solely affect VA borrowers or Ginnie Mae bonds, it also causes mortgage rates to rise, affecting the whole mortgage market.

To no effect

In order to reverse the effect of the refi rush, the government-owned corporation tried to place a six-month moratorium between a refi and a new mortgage. But that did not stop refinances from getting issued since lenders used exceptions as loopholes to bypass the moratorium.

For some who weren’t able to exploit the exceptions, data showed that they immediately returned to churning efforts even within the first day of the moratorium’s expiration.

Some experts see the malpractice as “almost like predatory lending.”

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